Introduction to find out if Saudization is

Saudi Arabia is a wealthiest
country with a large unemployment population. In order to reduce unemployment,
the Saudi Government introduced Saudization in the 1970’s. Saudization or Nitaqat system in
Arabic is a program by the Ministry of Labor that requires companies in Saudi
Arabia to employ nationals in their work and expand work opportunities for
Saudi women and youths.

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The Saudization objective is to
increase the number of employed Saudis in the private and public sector started
with the first Saudi Government’s first DP (Development Plan) in 1970 (1970 – 1975). And due to rising unemployment
rate and rapidly growing population in the late 1990’s, the government make it
as their priority (Fakeeh, 2009). Presently, the government of Saudi Arabia has
completed its ninth DP (2010-2014) and is working on its tenth DP (2015 –
2019).

The benefits of Saudization are very straightforward. It will
simply bring back the money that would have been remitted to families outside
the kingdom (9 per cent of GDP or $14 billion in 1999 alone) would then be
spent domestically Taecker (2003). In 2005, Labor Minister D. Ghazi Al Gosaibi
stated that Saudi Arabia will increase the pace of Saudization with national
employment strategy is to achieve 100 percent Saudization and expected to
employ 120,000 Saudi jobs every year in the private sector. (Trade Arabia,2005)

The main objective of the research is to find out if Saudization is
effective enough in curving unemployment rate from the current 11.6 % to 7 % by
2030 and identify the critical issues and constraints in fully implementing the
Saudization program. In addition, the paper will give the readers the insight
and idea on how Saudization works.

This study will be using exploratory methods of a number of studies
and review statistical analysis as well as government statistics in order to
satisfy its main objective.

Methodology

The researcher
will review and collate information from credible sources and previous research
studies that were done before on the same research topic. The primary research
method for this study is literature review of similar research. The researcher
will gather the data to finalized, collate, and formulate its conclusion based
research provided by the related literature.

Statement of the Problem

The research study
will give the readers the insight and idea on how Saudization works,
implemented and what is the rate of its success as well as identifies the
constraints in fully implementing Saudization program. More specifically, the
researcher seeks to answer the following questions in order to satisfy the
purpose of this research:

1.
How
is Saudization or Nitaqat system works?

2.
What
is the role of Saudization or Nitaqat in Vision 2030?

3.
Is
Saudization or Nitaqat effective enough in curving unemployment rate of Saudi
Arabia from the current 11.6 % to 7% by 2030?

Literature
Review

The focus of this research paper is about the
Saudization policies of Saudi Arabia, its impact to labor market. Additional
studies in the literature focus on quota-based employment policies that are
instituted for the purpose of nationalization of the labor force, especially in
the Gulf Cooperation Council (GCC) countries. These nationalization programs
are referred to as Bahrainization in Bahrain, Kuwaitization in Kuwait,
Omanization in Oman, Saudization in Saudi Arabia, Qatarization in Qatar, and
Emiratization in UAE.

How Saudization
Works

Nitaqat which means “bands” or
“zones” is designed to provide companies with more attainable targets. It
imposes sanctions to companies in non-compliance and provides incentives to
those firms in compliance in order to advance the Saudization agenda. The
Nitaqat sanctions and incentives have been strictly enforced. Nitaqat program
measures the nationalization performance of companies by calculating, over
successive periods of 13 weeks, a moving average of the percentage of Saudi
nationals employed by a firm, taking into account the firm’s economic activity
and size (Ministry of labor, 2011). Based on the measured nationalization
performance, companies are grouped into four bands: Excellent (Premium), Green, Yellow, and Red.
Where excellent or premium classified as entities achieving superior
nationalization performance with the highest percentage of Saudi employees.
Green are the entities achieving good nationalization with good percentage of
Saudi employees. Yellow are the entities achieving below average percentage of
Saudi employees and Red are the entities with poor nationalization performance
by hiring lowest percentage of Saudi employees.

Companies in red category are not
allowed to apply for new visas and not allowed to renew the existing work visas
of heir employees as well as transfer their employees visa to other jobs. In
addition, they cannot hire foreign workers from other firms while their foreign
employees are allowed to transfer jobs in premium and green category without
their consent.

Companies in yellow category can
renew the visas of their foreign employee for six years or more, but they are
not allowed to transfer visa to other jobs and cannot hire foreign workers from
other firms. They are not also permitted to open new facilities and cannot
apply for new temporary visas. As an incentive for meeting the Saudization,
they can renew work visas of their expatriates’ employees who have been in the
Kingdom for less than six years. In addition, they are entitled to one new visa
for every two of its foreign workers leaving the country on a final exit visa.

While companies in
green and premium categories enjoys no sanction and rewards. The companies
under these categories can renew the existing work visas of their employees and
can apply for new work visas every two months. In addition, these companies are
entitled to open profession visa wherein they can change and update their
foreign workers profession whenever possible excluding the jobs allocated for
Saudi Nationals. They can also hire foreign workers from red and yellow
categories with their consent and entitled for six month grace period for submission of Certificate of zakat and income tax. While companies in
green categories are entitled to a six month grace period in renewal of their expired professional
license , commercial registration and MOL documents, companies in Premium
categories is entitled to one year grace period.

Al-Asmari (2008) gives some background information on the efforts
made by the Saudi government in developing local manpower and replacing foreign
labor with Saudi nationals through the Saudization program. The study concludes
that more still need to be done in the development of local human resources and
in reducing dependency on foreign labor in the private sector. Saudi
government’s efforts and strides made at the education and training levels, the
development of some job-replacement policies, and the creation of career
opportunities are still not enough. The study also stresses the importance of
harmonizing the education system with the actual needs and requirements of the
labor market in Saudi Arabia.

Fakeeh (2009) conducted a study that attempts to determine if
Saudization is the solution to the unemployment problem in Saudi Arabia by
analyzing the shortcomings of the program as instituted by the government and
as used by the private sector. The researcher states that policy makers still
view Saudization as an economic and social necessity while understanding the
difficulties that the policy presents to the private sector and the reluctance
of the private sector in applying it. The paper concludes that Saudization
policies must fit the reality of the labor market in order to be more
efficient.

Ramady (2013) discusses the Nitaqat program and discusses the
effect of the economic growth and productivity in Saudi Arabia assuming the
introduction of a SAR 3,000 per month minimum wage for Saudi workers in the
private sector under the government’s Hafiz system. The paper concludes that
the Nitaqat program and the minimum wage policies would decrease labor
productivity and potentially affect other Saudi government’s initiatives such
as opening up the Saudi economy to the global market and raising the quantity
of foreign direct investment (FDI) inflows.

Peck (2014) analyses the effects of quota-based 2011 Nitaqat
policies on Saudization with firm size, and firm exit in the Saudi’s private
sector as its analyzing criteria. The paper used a comprehensive data set on
the full universe of Saudi private-sector firms to perform a regression kink.
The paper found that the Nitaqat program succeeded in terms of increasing the
employment of Saudi nationals but caused significant costs to private companies
and the shutting down of approximately 11,000 private companies within 16
months of its implementation.

Saudi Hollandi Capital (2012) provides an overview of the Nitaqat
program and discusses its effect on the Saudi’s economy. The research paper
highlights factors that driven the Saudi government to launch the Nitaqat
program such as the unsuccessful implementation of the Saudization program,
large number of foreign employees in the private sector, high unemployment rate
among Saudis, increasing youth population as well as unrest in the region. The
study states that the increase in the employment opportunities for Saudis and
the reduction in outward remittances are the positive effects of the Nitaqat
program while skills mismatch among local labor force, increase costs for
private companies, fall in the inflow of FDI, and closure of businesses are the
potential negative effects.

In Shah (2006), he investigated the
difficulties associated with the success of localization in the Gulf which are
specifically more relevant to Saudi Arabia. Primary amongthem are: 1) the
lucrative nature of visa trading for the local sponsors, along with a ready and
eager market of workers willing to buy such visas; 2) the continued reluctance
of the locals to take up jobs that have come to be seen as “foreigner’s work”
even though small attitudinal changes are beginning to be reported; 3)
preference among nationals for public sector jobs that are almost guaranteed by
virtue of nationality; 4) the near impossibility of the employer to fire
inefficient national workers in the government sector, resulting in poor
productivity and over-employment of nationals; and 5) the inherent contradiction
between policies to limit the number of expatriate workers on the one hand and
develop a thriving private sector that relies extremely heavily on the import
of such workers to survive and flourish.

Koyame-Marsh (2016) compares
the performance of the Saudization program before and after the implementation
of the Nitaqat during the eighth and ninth DPs. The researcher offers evidence
on the achievement of the Nitaqat program at effectively raising the number of
Saudis employed in the private sector and the shortcomings of the program in
reducing the level of unemployment for Saudi nationals.

From its inception in 2011 to 2014, the quota-based Nitaqat program
has reached its goal of moving companies out of the unsafe zones (Red and
Yellow bands) and increasing the number of Saudis employed in the private
sector. Saudi Deputy Minister of Labor Ahmad Al-Humaidan pointed out that
almost 86 percent of private firms and establishments were in the safe zones
(Green and Platinum bands) of the Nitaqat Saudization program as of October
2014. This was a big achievement for the Nitaqat program because in 2011, at
the start of its implementation, companies in the safe and unsafe zones were at
50 percent each (Saudi Gazette, 2014a).

According to SAMA or the Saudi Arabian Monetary Agency, Nitaqat
shows a positive output since its inception due to large increase in the number
of Saudi nationals employed in the private sector which rose by 83.6 percent
between 2011 and 2014. SAMA also noted
that Saudization rate in the private sector rose from 10.8 percent in 2011 to
15.5 percent in 2014, a 43.5 percent increase (SAMA 2013, 2015).

SAMA describe the employment rate a modest increase because of
higher number of jobs created in the private sector during those three years
with about 2.2 million jobs (90.2 percent of total jobs created) between 2011
and 2014 in the private sector alone. They noted however that only about 31.5%
of these jobs (0.7 million jobs) went to Saudis and the remaining 68.5 percent
went to foreign workers. However, overall assessment by SAMA states that Nitaqat
quota system was neither able to curb the level of unemployment for Saudis nor
speed up the overall Saudization process during the past three years of its
existence. SAMA also noted that unemployment rate of Saudi’s only fell from
12.4 percent in 2011 to about 11.7 percent at the end of the ninth DP in 2014.
The Saudization rate stood at 15.5 percent in the private sector and at 94.2
percent in the public sector in 2014.

The third phase of the Nitaqat program will be a game changer as it
will raise the minimum Green zone’s Saudization requirements for several
sectors such as manufacturing, construction, financial, retail, and wholesale
with the implementation of new calculation methods for the quota, and change
the incentives system. The Saudization requirement for these sectors will rise
from the current 28 percent to 32 percent for those companies in the Green
zone. While for large commercial
establishments, the Green zone minimum Saudization rate will more than double
going from 29 percent to 66 percent, while for big firms will rise from 25
percent to 41 percent (SICO, 2015).

In addition, start of the third phase of the Nitaqat will also
bring a new calculation of Saudization rate for private sector companies that
will be based on a moving average of the number of Saudi employees over
successive periods of 26 weeks after being registered with GOSI rather than the
current 13 weeks. Furthermore, the changes in incentives during the third phase
will affect mostly companies ranked in the low Green zone, while changes in
penalties will mostly impact companies in the Red and Yellow zones. Companies
in low Green zone will no longer be granted new workers’ visas nor will they
have permission to move employees around by changing their profession.
Companies in the Red zone will have their licenses revoked while those in the Yellow
zone will have their license suspended (SICO, 2015).

Conclusion

Analysis of the literature review for the effectiveness of
Saudization shows that there is some level of success in meeting its goals in
terms of employing more Saudi’s in private sector although at minimal level.
There is no doubt that Saudization is effective enough in reducing the
employment rate by 2030 as envisioned by Saudi Government. However, by doing
so, the government should be careful in terms of weighing in the rules that
apply to the companies in complying with the Saudization as it may also
adversely affect companies especially in fulfilling qualified talents. The
program should not be used to create a temporary job for unemployed Saudi’s
just for the sake of saying that it is working. Instead, it should work as a
long-term job placement for locals, but it can only do so if the companies or
the private sector are safe from ceasing their operations because they cannot
be able to meet the Saudization requirements. It is prudent that the Saudi
Government should consider the reality of Saudi labor market and its economy in
further developing Saudization rules as to not adversely affect the private
sectors especially the small and medium enterprises.